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Italy’s populist government defiantly refused to bow to EU demands to change its big-spending budget for next year, with interior minister Matteo Salvini declaring on Wednesday: “We won’t budge a millimetre.”

Rome now faces the threat of financial penalties being applied by the European Commission as the stand-off with Brussels intensifies, amid fears that Italy that could spark a eurozone crisis that would dwarf the one that engulfed Greece.

In a first for the EU, the Commission rejected the budget last month, saying that it represented an “unprecedented deviation” from the bloc’s spending rules.

Italy was told to go back to the drawing board and come up with a revised budget, but the text sent to Brussels late on Tuesday was little different from the original.

The coalition, made up of the anti-establishment Five Star Movement and the populist, nationalist League, is in no mood to compromise and knows that bashing Brussels goes down well with many voters, as European Parliament elections loom in May.

“We’re working on a budget that will guarantee jobs, greater rights to pensions and less taxes for many Italians. If Europe likes it, we’ll be happy, but if not we’ll plough on regardless,” said Mr Salvini, who is also deputy prime minister. “I can assure you, we will not budge a millimetre.”

Projecting an image of resolution and vigour, he was photographed going for a run around central Rome on Tuesday evening, before a meeting of the cabinet.

A staunch supporter of the armed forces and the security services, he wore an Italian police polo shirt for his jog.

The coalition wants to spend billions on rolling back pension reforms, introducing lower tax rates and guaranteeing a minimum monthly income for poor and unemployed Italians.

The government also said it is having to deal with the cost of recent disasters, including storms and flooding that killed more than 30 people last month and the collapse of a motorway bridge in Genoa in August.

Rome envisages a public deficit of 2.4 per cent of GDP next year, dropping to 2.1% in 2020.

Brussels says that with a debt pile of €2.3 trillion, or 131 per cent of its GDP, the country cannot afford such extravagance, and spending must be drastically reduced.

The EU disagrees with the figures provided by the Italian coalition, forecasting that the deficit will exceed three percent in 2020, which would breach the bloc’s spending limits.

Brussels is also skeptical of the coalition’s economic growth forecasts, saying that growth is likely to be 1.2 per cent rather than the 1.5 per cent confidently predicted by the government.

Luigi Di Maio, the head of the Five Star Movement, said that spending big was the only way to drag Italy – the third largest economy in the euro-zone - out of the doldrums.

"The budget will not change, neither in its balance sheet nor in its growth forecast. We have the conviction that this is the budget needed for the country to get going again,” he said.

The Commission has warned that Italy’s refusal to amend its budget could result in the activation of an "excessive deficit procedure" which may result in financial penalties that could add up to 0.2 per cent of Italy’s GDP, rising to 0.7 per cent if Italy still fails to comply.

The procedure could start as early as next week. Brussels has never before fined a country for flouting spending rules.

The Commission should be tough with Italy, said Markus Ferber, a German conservative on the European Parliament's economic and monetary affairs committee.

"Italy is going for escalation," Mr Ferber said. "If the integrity of the EU fiscal rules matter at all for the European Commission, it has to take a tough stance on this provocation."

Italy’s deepening rift with Brussels and its refusal to compromise have spooked the markets and alarmed investors.

“The conflict between Italy and EU institutions is likely to drag on through early to mid-2019, raising market pressure on the Italian administration,” said Agnese Ortolani, an analyst at The Economist Intelligence Unit.

“Owing to the €2.3 trillion public debt stock and the weakness of its banking sector, Italy would be too large to rescue without massive ECB support in the event of a large-scale financial crisis.”

Italy's sky-high spending plans are opposed by the European Commission and many EU governments, who fear a new euro-zone crisisCredit:
Tiziana Fabi/Getty/AFP

Andrus Ansip, European Commission vice-president, said Italy had an obligation to abide by the rules it had signed up to as an EU member state.

"When you're in the eurozone family, you have to respect the rules we have given ourselves. Running up debt with taxpayers' money is not an intelligent idea.”

Massimo Franco, an Italian political commentator, said it was “not just the government that has chosen the path of conflict. The EU seems to be determined to accept the challenge and is convinced that it can win with the support of the majority of other countries.”

The battle between Rome and Brussels is “destined to worsen,” he wrote in Corriere della Sera newspaper.